As a parent, you know it’s expensive to raise a child. You also know that it’s not going to get any easier come post-secondary school age. That’s true whether junior remains under your roof, or takes up residence across town or even further away.
It’s a big financial hit that can be especially stressful if you have to foot that bill all in one fell swoop. Saving over time towards that need is not only prudent for your own cash flow, it also lets you grab a significant contribution from the public purse.
How much does post-secondary education cost?
Most parents don’t need to be convinced that post-secondary education could be costly, but just how much may surprise you.
Each September, Statistics Canada releases its annual survey of tuition and related school fees. Over the last decade or so, it’s shown an annual increase of about 4% a year. At that rate, costs will double in 18 years, roughly the time from birth to the end of secondary school. For 2018/19, that combination of tuition and mandatory school fees averaged about $7,800 a year over an undergraduate degree. Housing and other living costs would be on top of that.
Of course, university is not the only option, things may be different in your locality, and the trend may change. But it helps to be aware, and it helps even more to be prepared.
Benefits of saving with an RESP
The government established registered education savings plans (RESPs) to provide families with a tax-assisted way to save for education. That’s not to say that you can’t save in other ways, but RESPs are the common starting point for most families.
When money is invested in an RESP and eventually paid out for education expenses,
- your original contributions come out tax-free
- there is no tax on the year-to-year earned income while in the plan, and
- the paid-out income is taxed to the student who is the beneficiary of the plan.
In sum, you are able to defer paying tax for years or decades, then have it calculated based on someone who you expect will likely be at the lowest tax bracket, possibly zero. And it gets better.
The 20% government contribution
Working in tandem with RESPs are Canada Education Savings Grants. This is money the government will pay into your RESP on top of your own contributions.
The base calculation is a 20% matching grant on up to $2,500 of your annual contributions, which gives you as much as $500 a year. One way to look at this is that you get an automatic 20% return on your savings, before you even make any investment decisions.
The lifetime maximum grant money for an RESP beneficiary is $7,200, which in principle would take about 14 or so years of regular contributions. However, life isn’t always so predictable and consistent, so the rules allow for carrying unused room forward to later years, though it can get complicated. On the other hand, you may lose out on grants altogether if you start too late.
Talking with your financial advisor will help you understand RESP and education grant rules, decide how to work them to your benefit, and get you started down that path.
A version of this article was originally published on November 28, 2018
